Microsoft, Google Still Going Concerns

Investors were on tenterhooks for mega-cap tech earnings, and not just because the “broad” market lives and dies by the figurative and literal fortunes of an oligopolistic confederation of surveillance capitalists.

Headed into reporting season, many market participants, myself included, expected guide downs aplenty followed by downward revisions, as analysts came to begrudgingly view their own profit projections as too optimistic in the face of gale-force macro headwinds.

If America’s tech titans make it through unscathed, the “grand reckoning” thesis (as it were) would take a hit, even if high profile warnings from the likes of Walmart serve as intermittent reminders of consumers’ painful predicament.

On Tuesday afternoon, Microsoft reported its slowest sales growth since 2020. Revenue of $51.87 billion rose 12% YoY, and came up short of consensus. EPS of $2.23 was likewise a miss. Consistent with a warning delivered weeks ago, the company cited the currency headwind, which was a fairly large drag. Revenue rose 16% in constant currency terms (figure below).

In addition to the $460 million revenue hit Microsoft tipped early last month, the company incurred an additional $140 million FX impact over the course of June, nudging results towards the low-end of the company’s revised guidance.

Scaling down the company’s business in Russia resulted in a $126 million operating expense. Separately, employee severance costs were $113 million. Microsoft’s hiring slowdown is now a fixture of the financial news cycle. Press reports of job cuts at the tech giant started in May and haven’t let up since.

Most of the numbers looked light, if not by much. Productivity and Business Processes revenues were short ($16.6 billion versus $16.78 billion expected), as was Personal Computing ($14.36 billion versus $14.67 billion). Intelligent Cloud revenue of $20.91 billion looked like a decent beat. But growth in Azure slowed to 40% (GAAP) from 46% last quarter and 51% during the same period last year.

If you’re the optimistic type or otherwise predisposed to glass half-full thinking (so, if you’re not me), you might shrug and casually note the absence of land mines. The shares were generally stable after hours.

Jefferies captured it pretty well, calling the results “not great.” Barclays was a bit more generous. “Microsoft held up relatively well considering FX, supply chain issues and a worsening macro,” the bank said, noting that constant currency growth showed “only a small deterioration.” “At the end of the day,” investors care about the core enterprise businesses, and those were “decent,” Vital Knowledge remarked, calling Azure growth “healthy.”

It’s worth noting that Microsoft trades at “just” 24 times expected profits, cheaper than usual — the average over the last half decade is around 28. So, if you love it, it’s what passes for “cheap” these days. Like a gallon of gas for less than $5.

Meanwhile, Alphabet was “resilient,” to employ the same adjective everyone else will use to describe results which broadly matched estimates. Revenue of $69.7 billion was a lot of money, but nevertheless represented the slowest pace of annual growth since Google’s first ever revenue decline in 2020 (figure below).

The chart shows the “very” top line number (if you will). The ex-TAC print was $57.47 billion, slightly short of the $58 billion consensus expected.

In all likelihood, markets will focus on Google’s ad revenue beat. $56.29 billion was comfortably ahead of consensus. That’s a huge relief on the heels of Snap’s results, which dealt a pretty severe blow to sentiment last week. By contrast, Ruth Porat cited “broad-based strength in advertiser spend.”

While describing Alphabet’s (relatively) strong ad results, Bloomberg unironically noted that “the company is… battling a number of lawsuits and regulatory threats, including a federal antitrust lawsuit over its dominance of the online advertising market.”